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Running out of Steam?

Steam has generated immense of amount of value for gamers and video game developers. Could capturing too much of that value lead to its downfall?

Since its 2003 launch, Valve Corporation’s digital distribution platform Steam has changed the landscape of video game publishing. The platform is free-to-download and provides its users the chance to instantly download one of approximately 781 million games.[1] As of 2017, the platform boasted 67 monthly active users and nearly continuous growth of average daily players.[2][3] This success indicates the significant value creation taking place on the platform for its multiple stakeholders.

Steam Store (accessed February 24, 2019)

Value creation:

First, consumers clearly derive a great deal of benefit from the Steam platform. Beyond providing access to numerous games that would otherwise be inaccessible, the platform provides numerous value-add components. For example, a prospective buyer can rely on numerous reviews and curated profiles to evaluate and source their next game purchase. Similarly, by analyzing user purchase and playing behavior (e.g., number of hours spent playing specific games), Steam generates tailored recommendations for its users. Beyond helping users make the right purchase, Steam also provides easy access to ongoing updates and downloadable content for their games, thereby allowing their users to maximize the value of their purchase.

From HBS Digital Initiative

Second, the platform creates value for video game developers. The publishing industry, typically dominated by so-called AAA publishers, previously offered little-to-no opportunity for smaller scale video game developers to distribute their products. That all changed with the emergence of the Steam platform, which provided independent video game developers access to its 75 million active users.[4] In addition to the installed user base, Steam provides developers with Steamworks, a free suite of tools for developers to employ in their games (e.g., anti-cheat technology, in-game microtransactions, etc.). Lastly, Steam has been touted as a major deterrent for the piracy that has plagued other digital media industries.

Value capture:

The most contentious issue with Steam’s offering is their approach to capturing value. Steam takes 30% of all purchases on the platform.[5] This sizable fee has drawn much criticism from game developers, who question the worth of Steam’s value-added services.[6] In fact, several of the best-selling and most popular games, such as Fortnite, FIFA 19 and Red Dead Redemption 2, have made their games unavailable on the Steam platform. Furthermore, competition has intensified in the digital distribution space: major video game publishers like Activision Blizzard, EA, and Epic Games have invested in their own digital distribution platforms.[7] Under this pressure, Steam recently announced a change to its pricing strategy. As a game’s sales grow beyond $10M, Steam will take a lower percentage of revenues. While this change will only affect major developers, it demonstrates Steam’s fine-tuning of their platform model in the face of criticism.

As reflected in its near monopoly on digital distribution of video games, Steam creates an immense amount of value for its users and game developers. However, recent pressures on the platform’s approach to value capture have drawn into question the longer-term viability of Steam’s approach. With major games staying off the platform, could Steam jeopardize its position as the market leader?

4 thoughts on “Running out of Steam?”

Interesting take on chinks in Steam’s armor. You do a great job outlining Steam’s strengths in addition to its large user base (built up reviews, tailored recommendations, developer tools), but I agree that the threat to Steam is very real. If another platform is able to attract larger games with lower transaction fees, then I could see the smaller games also listing their games on that platform as well, given that the big games could draw enough of a user base to start the network effect flywheel again, especially as the costs of multi-homing seem to be incredibly low for users (downloading an additional desktop application for free, for example). Steam should be very worried about a flight of small developers following the big names… Furthermore, the reviews and recommendations you mentioned as potential switching costs for users seem relatively weak given the ease of looking online for trusted reviews and finding recommendations on blogs or review sites based on games you’ve enjoyed.

I also wonder if there are negative network effects here as Steam has gained such scale – do you think having 781 million games on the platform is a deterrent to game developers? How can a new developer possibly get noticed given the amount of competition? I guess you could say the granular recommendation algorithm might be able to suggest a new game to users based on their past interests and encourage discovery that way, but joining a newer platform and being one of a smaller assortment of games might be attractive to smaller developers.

This kind of platform seems to me very vulnerable to disintermediation by nature… given internet distribution, it’s fairly easy to set up a website and download link and use online marketing to attract beta users and bloggers, and so I’m pretty shocked that Steam is able to charge 30% for a service the developer might do themselves relatively cheaply. I think the existential threat here is a race to the bottom in terms of transaction fees across multiple game distribution platforms as each element of Steam’s value prop is broken up into more specialized pieces (especially for the big money making names): review and recommendation sites, separate game development packages, and separate download sites. I’m actually not sure what Steam could do in response except hold users’ purchases to-date hostage, though that could really spike user rage…

Great analysis on some of the weaknesses of Steam. I would also add that the relatively new chat/voice platform, Discord, is threatening their current position (and has 200 million+ unique users). Discord has started to sell video games with a significantly lower take from the developer (only 10% – https://www.theverge.com/2018/12/14/18139843/discord-pc-games-store-revenue-split) and their CEO even made the comment, “Turns out, it does not cost 30 percent to distribute games in 2018″, which seems squarely aimed at platforms like Steam. Discord has a vastly different revenue model and therefore can accept a lower price, whereas Steam seems completely dependent upon game developers for revenue. It will be a long time before Discord, or any other platform, touches Steam in terms of sales or games offered, but it is interesting to see the indsutry standard of 30% slowly fading away in the face of new competition and business model innovation.

I find Steam’s distribution system fascinating. As other commenters have mentioned, it is very impressive to have built such a profitable digital distribution system without the natural advantages from related search/OS/web businesses (as Google, Apple, and Facebook have done). The costs to multi-homing are very low.

However, this makes me question whether Steam plays a vital role in the market. I wonder if the company has to do lots of engineering to ensure games run smoothly on many different types of computers. I don’t have a concrete understanding of how big a task this is – but could account for the firm’s ongoing success.

As a long-time gamer since I was a kid, I was skeptical when Steam was first launched and the fact that they eventually became the biggest giant in the digital gaming platform (and market) is undeniably magnificent, not to mention the gaming community they built. In my opinion, part of the biggest factor of their success is they were able to transform the notion of “gaming” from a geeky activity into something that is cool (and competitive, with millions of dollars for tournament prizes every year) which drives more user and business to their platform. However, reading your analysis on how long are they going to keep the trajectory makes me wonder what’s next for them and their massive user base. Great piece!!!!